Telehealth Opportunity or Telehealth “Parity”?

Telehealth provides a great opportunity to reduce costs and improve quality in U.S. health care. It uses information technology to eliminate distance within the system. A subset of telehealth is telemedicine, which allows physicians to consult patients over the phone, by text, or video.

Take a couple of obvious examples: Telepsychiatry, whereby a patient undergoing talk therapy has a session with his psychiatrist over the phone instead of having to go to the doctor’s office; or e-prescribing, whereby a patient can describe symptoms over the phone or send a photo (of, for example, a rash) and the doctor can prescribe immediately (if appropriate).

Most people tend to categorize these as “no-brainers.” If we paid for our own care directly, these and many other examples would have long since taken off. However, because payment for medical care is dominated by health insurers and government, these innovations have been stifled. Third-party payers impose obstacles because they fear paying fraudulent claims. Nevertheless, telemedicine is growing. There is one pure-play telemedicine provider listed on a U.S. stock exchange: Teladoc, Inc. (NYSE: TDOC).

Teladoc went public 14 months ago at $19 per share, jumping to over $30 during its first trading day. Since dipping below $10 this spring, Teladoc’s stock has come back to near its IPO level on good news. In the quarter ending June 30, revenues grew by almost half (year on year) to over $26 million. Teladoc still loses about $15 million per quarter. Nevertheless, analysts recognize its growth potential. According to Zacks Equity Research:

Teladoc is renowned for clinical quality and patient satisfaction, which will enable it to maintain its leading position in the rapidly growing telemedicine industry. The company is seeing its business growing steadily with insurers and customers increasingly embracing telehealth. The second quarter of 2016 marked the fourteenth consecutive quarter in which the number of telehealth visits increased faster than its member base. This reflects a trend of rapidly increasing adoption of this service.

This is not a business, or an industry, that needs government favors. However, because this is American health care, interested parties just cannot help themselves but to demand government put its thumb on the scales to ensure success.

This is the topic of a new health policy brief published by Health Affairs, a leading journal, which reviews federal and state laws governing telemedicine. One government intervention discussed is so-called “parity,” which many telemedicine providers demand:

While states have implemented telehealth coverage laws, of greater concern and controversy are telehealth parity laws that require reimbursement by health plans for telehealth services at the same or equivalent rate as paid for in-person services. Without parity laws, health plans can pay for telehealth services at only a percentage of what they pay for in-person services. Many telehealth coverage laws passed by states fail to include parity language …

Good! It is hard to imagine a more harmful policy for the appropriate uptake of telemedicine than government-dictated payment parity. In some cases, patients might actually be willing to pay more for convenience. Of course, our third-party payment health system does not value convenience to patients in most cases, so we will never really know.

On the other hand, much telemedicine depends on technological innovation that should reduce the cost structure of providing care. If so, those providers should compete on price. Markets can adapt to serve customers’ needs under a certain burden of regulation of safety and standardization, but it is very hard for markets to adapt efficiently to regulated prices. If providers are not competing on price, they are not properly competing at all.

Indeed, the primary reason we are able to benefit from telehealth is the deregulation of telephone service from 1982. Imagine if new entrants competing against AT&T had demanded the government regulate a price floor, at the same tariffs as had prevailed during AT&T’s monopoly. We never would have seen the cost-cutting innovation that resulted in today’s smartphones and other technologies that make telemedicine economical and efficient.

The key to successful adoption of telemedicine is to restore a greater share of patients’ health spending to their direct control, not to impose price regulation.